The Best Offense

Joe Montgomery displays a high-tech knee brace prominently in his Williamsburg, Va., office. It's the kind he wished he had during his football-playing days at William & Mary. The brace is lightweight and prevents the type of painful leg injury Montgomery suffered as an offensive lineman in 1973. To Montgomery, now a top financial advisor at Wells Fargo Advisors, the brace is a reminder that risk management demands the best, most modern tools available.

"Most people are too focused on returns," says Montgomery, 60. "And they ought to be focused on where the risk is coming from and what is creating it."

He shows his prospective clients a timeline that equates investment approaches with human evolution. Most portfolios—dominated by U.S. stocks, Treasuries, and corporate debt—are reminiscent of our distant ape-like ancestors who walked hunched over with their hands on the ground. The portfolios are in the "knuckle dragging" phase, Montgomery says.

ENLARGE

The Mission: Investors "ought to be focused on where the risk is coming from and what is creating it."
Stephen Voss for Barron's

Naturally, he favors fully evolved Homo sapiens. That means exposure to emerging-market equities, managed futures, private equity, hedge funds, commodities, and emerging-markets debt denominated in local currencies. This kind of diversification, with both international and alternative investments, usually performs better than U.S. stocks alone and with damped volatility. In fact, domestic stocks make up just 11% of Montgomery's typical portfolio.

Much of the investment mix is derived from Montgomery's institutional expertise. His 14-member team manages money for insurance companies throughout the country and consults for Virginia's Treasury Department.

In total, Montgomery manages nearly $15 billion, including his work for 350 private clients with a median account of $7 million. He is a fixture on Barron's list of top 100 advisors; he ranked 47th on the 2012 list.

"The amazing thing today is we can create institutional-caliber allocations at almost any dollar level," Montgomery says.

One example: Wells Fargo Advantage Absolute Return (ticker: WARAX), a fund that invests in equities, bonds, and alternatives with one goal in mind: to seek a positive total return, while preserving capital.

ENLARGE

Five years ago, Montgomery says, such funds required a minimum investment of $1 million. Today, $1,000 is often enough.

"That's democratization of investing," Montgomery says. "The problem with that is it's not quite as simple as saying they leveled the playing field. You still need to know how to play."

The sports analogies come easily to Montgomery, whose office is full of football memorabilia, including signed footballs from William & Mary alums like Mike Tomlin, the head coach of the Pittsburgh Steelers. Montgomery frequently mentions the impact of Lou Holtz, the onetime William & Mary coach who lured Montgomery away from Virginia Tech, essentially his hometown school. The advisor still follows Holtz's game plan for managing staff: "He surrounded himself with incredible people who have incredible skill sets and then let them do their job."

Montgomery signed with the Philadelphia Eagles in 1974 but never made it out of training camp. Instead, he headed to the short-lived World Football League for a year and then made the jump to the investment business, joining Wheat First Securities. He has been working for the firm and its successors ever since.

HIS APPROACH TO the markets has changed with the times. By investing in emerging-market debt using local currencies, for example, Montgomery has found a good tool for escaping "correlation," or the risk that traditional investments will track one another's performance, as they did in the 2008 market collapse.

Debt denominated in local currencies often follows its own course, as Montgomery's institutional clients have known for years. It has only recently become available to retail investors. Today, Montgomery's clients get access to the asset class through the Eaton Vance Emerging Markets Debt Local Income Fund (EEIIX). In 2008, when the Standard & Poor's 500 lost 37%, the fund was down just 7%.

Markets will remain volatile, Montgomery knows. It's the new reality, and it will force investors to evolve. It's no time for knuckle dragging.

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